The US is currently looking at taxation of virtual communities. Congress's Joint Economic Committee (JEC) senior economist Dan Miller admitted that a congressional report on the move to tax virtual goods will be released in August. The move is likely to have significant effect on the popularity of virtual communities such as Second Life.
JEC have been examining the issue of virtual economies since October 2006. They are aware that “Second Life ‘currency’, Linden Dollars, can be exchanged for what any tax authority would recognise as real currency. The initial advice from the JEC is that if transactions take place entirely within the virtual economy, then it is not considered a ‘taxable event’. However redeeming tangible prizes and awards in the real world may be a different matter.
The British Government is going down similar lines of investigation. HM Revenue and Customs (HMRC) are deciding on whether to charge tax on Second Life ‘inworld’ profits. KPMG’s David Nickson urged the British Treasury last month to take a "proactive approach" to the taxation of profits earned in online games. He argued the government should treat the issue as an entirely new framework and assess the scope for tax planning and fraud, as well as considering the tax implications of virtual businesses. “This kind of activity is so recent a phenomenon that it would be impossible to see how existing taxation frameworks could adequately cope,” he said.
Second Life was launched in 2003 by San Francisco based Linden Research (commonly known as Linden Lab). It now has over 4 million users in a 100 countries. Second Life is a virtual world, thought by many to represent the natural evolution of the web. In the world users explore islands, go to parties, meet people and build property. According to its own website, Second Life’s world is “constantly changing and growing”. New players can create avatars, create entities and use a scripting language to add behaviours to objects. The key point is that users retain the IP rights to their creations which they can then sell in the game. While the game is a social network, there is also a serious economic side to it with a marketplace and its own set of rules.
The virtual currency is Linden dollars (Linden or L$ for short). The L$ is convertible into real dollars if players so choose, in an online market at a fluctuating exchange rate set by players. As of 27 June 2007, that rate was L$270 to US$1. A total of $US 239,000 changed hands yesterday on the LindeX.
In Australia, 12,000 people have created virtual avatars in “Second Life” making it the 11th largest community worldwide. In March, Telstra's BigPond opened its island, The Pond, where users can browse, chat, look around and attend events. Importantly for Telstra they can also buy songs and watch movies. Victorian university RMIT has also got involved, launching its island this month. It features digital sculptures, buildings and art created by RMIT students in the School of Architecture and Design as part of their coursework.
In a 2005 interview Linden Lab’s CEO Philip Rosedale said that the Second Life economy generated US$3.6 million in economic activity during the month of September 2005 from a user population base of 70,000. Rosedale has grand ambitions for his product and wants to offer everyone on the internet a 3-D presence “Second Life is the next evolutionary step after the Web” he said.
But a new software program doing the rounds within Second Life is threatening to render the Linden dollar worthless. The program called 'CopyBot' allows objects to be cloned at no cost. Second Life retailers have protested to Linden Lab to put a stop to the potential 'theft' of their products. However the company has said they cannot prevent this and told “residents” could always invoke the Digital Millennium Copyright Act if their copyright had been violated.